Multiple Choice Questions
1. Candy Corp. is a C corporation that began operations in year 1. Candy Corp.'s year 1 through year 3 taxable earnings and profits (E & P) are computed as follows.
Year E & P
1 ............. ($25,000)
2 ............. 5,000
3 ............. 10,000
On the last day of year 3, Candy Corp. makes a $12,500 cash shareholder distribution, distributed equally between its two shareholders, Goode and Plenteau. How much of Goode's distribution is a nontaxable return of capital? Assume sufficient basis in Goode's stock investment.
a. $5,000
b. $0
c. $1,250
d. $6,250
2. As of December 31, Eliot Corp. reports net income per books of $100,000, which includes municipal bond interest of $4,000, a deduction for business meals of $5,000, a deduction for a net capital loss of $5,000, and a deduction for Federal income taxes of $22,000. What is Eliot Corp.'s current earnings and profits (E & P) for the tax year?
a. $98,500
b. $107,500
c. $125,500
d. $100,000
3. As of December 31, Hardy Corp. reports net income per books of $120,000, which includes straight-line depreciation expense of $5,000. Hardy Corp. claimed accelerated depreciation of $15,000 for tax purposes. Also included in book income were lobbying expenses of $4,000 and a Federal income tax refund of $5,000. What is Hardy Corp.'s current earnings and profits (E & P) for the tax year?
a. $119,000
b. $109,000
c. $120,000
d. $114,000
4. As of December 31, Caledonia Corp. reports taxable income of $150,000, which includes a $20,000 accelerated depreciation deduction; had straight-line depreciation been used, the deduction would have been $6,000. Also included in taxable income is an operating loss carryforward from a prior year of $3,000. Additionally, Caledonia earned $4,000 in municipal bond interest during the year. What is Caledonia Corp.'s current earnings and profits (E & P) for the tax year?
a. $164,000
b. $171,000
c. $157,000
d. $168,000
5. At the beginning of the year, Crispin, a C corporation, held a deficit of $35,000 in accumulated earnings and profits (E & P). For the current year, Crispin reported E & P of $12,000. Crispin distributed $10,000 during the year. What was the amount of Crispin's accumulated E & P deficit at year-end?
a. $23,000
b. $33,000
c. $27,000
d. $37,000
6. On January 1 of the current year, Quail Corp., an accrual-basis, calendar-year C corporation, held accumulated earnings and profits (E & P) of $20,000. On December 31 of the current year, Quail Corp.'s current E & P was $24,000, earned evenly throughout the year. Ray and Devi were sole equal shareholders of Quail throughout the year. Quail made two distributions to the shareholders during the year: $30,000 on July 1 and $30,000 on December 31. How much of the December 31 distribution is taxable dividend income for Devi?
a. $7,000
b. $11,000
c. $6,000
d. $1,000
7. Compendium Corp. distributed cash and personal property to its sole shareholder. Considering the following facts, what is the amount of gain that would be recognized by Compendium as the result of making this distribution to its shareholder?
Item Amount
Cash .............................................. $25,000
Personal property
Fair market value ............................... 10,000
Adjusted basis .................................. 4,000
Liability on property assumed by
shareholder ...................................... 12,000
a. $4,000
b. $6,000
c. $8,000
d. $29,000
8. Calvin owns 40% of the outstanding shares of Copernicus Corp., which holds accumulated earnings and profits of $100,000 as of December 31, year 1. The outstanding shares not owned by Calvin are owned by parties unrelated to Calvin. On January 1 of year 2, Calvin, wishing to pursue another business opportunity, sells his stock back to Copernicus Corp. Copernicus distributes cash of $250,000 in redemption of all of Calvin's stock. If Calvin's adjusted basis for the stock on the date of redemption is $125,000, what will be the tax effect of the redemption to Calvin?
a. $125,000 capital gain
b. $25,000 dividend
c. $125,000 dividend
d. $150,000 dividend
9. Katsu Corp. distributes property to its shareholders as part of a complete liquidation. The fair market value of the property is $500,000, Katsu's adjusted basis in the property is $150,000, and the property is subject to a liability of $200,000. What amount of gain will Katsu recognize as a result of the transaction?
a. $150,000
b. $550,000
c. $300,000
d. $350,000
10. Close Corp. distributed cash and a parcel of land in a nonliquidating distribution to its sole shareholder. The following facts apply to this distribution.
Item Amount
Cash ............................ $50,000
Land
Fair market value ............. 30,000
Adjusted basis ................ 40,000
Based on these facts, what amount of gain or loss should be recognized by Close Corp. as a result of this distribution?
a. $60,000 loss
b. No gain or loss should be recognized
c. $10,000 loss
d. $40,000 gain